15 Chapter 7

Chapter-7
Economic Thoughts of Kautilya
7.1. Introduction 413
7.2. Kautilyas Arthastra 414
7.3. Economic Ideas of Kautilyas Arthastra 415
7.4. Elements of Modern Economics Evident in

Arthastra 455
7.5. Kautilyas Coverage and Early Western Thought

On Political Economy 456
7.6. Topics Cover in Arthastra 458
7.7. Conclusion 463

Contemporary Relevance of Economic Thoughts of Kautilya
7.1 Introduction
The Arthastra is a comprehensive treatise encompassing many aspects
of human life.
Artha means wealth and Shastra means science; thus Arthastra literary
implies the science of acquiring and managing wealth.
The treatise comprises a cohesive whole, including economic

administration of the state, trading, imports/exports, retailing,
transportation, and warehousing and consumer welfare.
Kautilyas Arthastra describes how these functions the field of

economics was performed in Mauryan time.
Kautilyas Arthastra contributes to the history of marketing thought in

a culture that has barely been discussed in the literature.
It is remarkable that a book such as Arthastra should have been written

more than 2000 years ago in northern India. It is by any substantial a
book of substantial size. Its coverage includes economics, political science,
public administration, law and statecraft. It is intended to provide
practical advice for the management of the state and thereby enhance the
wealth of the nation.
Essentially, Arthastra is a treatise on political economy interpreted in its

broadest sense. While the exact date of its completion is unclear, the
available evidence suggests that it was written somewhere between 321
and 286 BC.
Kautilya was a great statesman as well as a great scholar. He played a

dominating role in the formation and functioning of the Maurya Empire.
Subsequently under his guidance, growth with stability was attained in the
empire with the help of strong administration and efficient fiscal
management. His attainment in the sphere of scholarship is undoubtedly
laudable. The Arthastra consists of detailed analysis of different
aspects of ancient Indian economy.
Kautilya presents view of the purpose of economics and the function of the
king before examining his views about the Treasury and taxation.
Kautilya gives the importance for the state in relation to industry,
commerce and agriculture, as well as his prescriptions about the use and
conservation of natural resources.
Kautilyas work can also be used to illustrate several aspects of economics

emphasized in modern economics, such as the principal-and-agent
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problem, information asymmetry, urban-bias, principles of taxation, the

importance of national economic accounting and census data, the
importance of property rights for economic activity and so on. Such
aspects are outlined and, before concluding, further attention is given to
Kautilyas views about the role of the state in contributing to the social
security and welfare of its citizens.
7.2 Kautilyas Arthastra

Kautilyas principles served as guidelines for many economically activities
through time.
Kautilya was a great proponent of the notion that the state or government
has a crucial role to play in maintaining the material well-being of the
people in a nation.
The teachings of Kautilya, also known as Chanakya and Vishnugupta,

have significance for both these countries, India as well as Netherlands,
though both are at different points of a growth curve
Kautilyas work was encapsulated in the book Kautilyas Arthastra;

the way of financial management and economic governance.
A significant part of the Arthastra deals with the science of wealth or

economics. When it deals with politics, the Arthastra describes in detail
the art of government in its widest sense; the maintenance of law and
order of efficient administrative machinery.
Kautilyas Arthastra focused on creation of wealth as the means to

ensure the well being of the state.
A perfect balance had to be maintained between state management and

peoples welfare, and this was the essence of Katutilyas economic treatise
Arthastra, created about 2500 years ago.
Kautilya compiled his political ideas into the Arthastra, one of the
worlds earliest treatises on political thought and social order.
It set forth ideas of state graft and monetarism and also a code of civil and
criminal law.
Arthastra literally translates from Sanskrit as the science of wealth.

Artha corresponds to the work wealth in Sanskrit, and sastra to
science. Kautilya recognized that the wealth of nations does not depend
purely on narrow economic factors but on a broad array of factors. His
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treatise, therefore, takes into account economic, political, diplomatic,

social, military, and other aspects that may affect the wealth of a nation.
Although his work has a strong focus on the wealth, effectiveness and
wellbeing of the king, His actual ultimate objective, however, was not to
benefit the king but to benefit the people. He thought a strong and wealthy
monarchy would be in a position to protect the interests of the people
against the invasion of other kings. He has repeatedly mentioned that the
king must keep his subjects happy and should not impose any repressive
rule except during emergency.
Kautilya makes it quite clear that the power of the king is not unlimited
but he has implicit contractual duties to fulfill as part of his office an
implicit social contract is present between the king and his subjects.
The traditional ends of human life, Dharma (righteous living), Artha

(material well-being), Kama (enjoyment of sensual and artistic things), and
Maksha (freedom from the birth-death cycle) all go together, and
enjoyment of a full life was thought to be impossible without any one of the
above ends. Of these, Artha occupies a key position in human life.
Kautilya, the foremost economic thinker of ancient India, treated
economic topics along with political matters in his Arthastra. Another
source of ideas on economic matters was Santi Parva of the Mahabharata,
the epic wherein advice concerning the accumulation and distribution of
wealth was interspersed with advice on how to run a country.
The Arthastra focused on preservation of the state through alliances,

and viewed good counsel and correct judgment as the constituents of the
states power and more useful than military might.
Arthastra takes a managerial perspective on managing the affairs of the

state.
7.3 Economic Ideas of Kautilyas Arthastra

7.3.1 The Kautilian Economy
The Arthastra divides the economy of the state into three basic types of
the activities- agriculture, cattle rearing and trade.
It deals with self-sufficient economy based on indigenous ways of

production; distribution and trade, and discusses monetary and fiscal
policies, welfare, international relations, and war strategies in detail.
Arthastra, depicts in many ways the India of his dreams.
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When he wrote this volume of epic proportion, the country was ridden in
feudalism and closed and self sufficient economy.
The economy based on indigenous ways of production; was in a

transitional phase, moving towards the advanced aspects of distribution
and production. Culture and regional politics directed the way in which
trade was done.
The state accumulated wealth by generating resources in the form of

grains, cattle, gold, forest produce, trade and labour.
Because of the regime was authoritarian in nature, everything was

organized in the interest of the state.
A civil service existed and there were departments for accounts, revenue,
mines, arsenals, taxation, agriculture, trade and navigation.
Besides maintaining the existing productivity in forests, factories, mines

and cattle herds, the king was also responsible for promoting trade and
commerce by setting up market towns, ports, and trade routes, building
storage reservoirs.
Kautilyas work dealt with such diverse economic subjects as accounts,

coinage, and commerce.
The whole economic policy was regulated and controlled by the state.
It was the largest employer of labor. All industrial and natural resources
were possessed by the state.
The state also entered the market as a trader. It engaged in selling

activities at the market place.
It had its own superintendent of commerce who would supervise the

dealings in the market.
The revenues earned by sale of resources possessed by the state would be

directed to the treasury.
Manufacturing industry gained impetus in the Maurya period, which was

about the era of Kautilya.
7.3.2 Economic Administration
Money was used as the medium of transaction, in the form of coinage.
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This is indicative of the function of monetary exchange which leads to the

place of marketing.
The coin used was the pana, which was subdivided as follows: sixteen
mashak as to a pana and four kakan is to a mashaka. The coinage in
circulation was: silver coins of one, half, quarter and one-eighth of pana
and copper coins of one mashaka, half a mashaka, one kakani and half a
kakani.
The value of coinage was sought to be maintained by stringent

punishments for counterfeiting.
A special official, the Coin Examiner, certified the genuineness of coins

which were meant for circulation and exchange in market transactions.
The state and private merchants, both local and foreign, were involved in
trade.
These merchants could sell their wares to customer in the market place, or
to the state in bulk quantities.
The state would thereafter distribute these goods for sale in the market
place, while retaining back some stock as reserve/ buffer.
The chief controller of State Trading was responsible for the equitable
distribution of local and foreign goods, buffer stocking, sale of crown
commodities and public distribution. He could appoint private traders as
agents for the sale, at fixed price, of crown commodities or sell them direct
to the public through state- owned retail outlets.
The governance structures then projected the potentialities of centralized

administration, but having adjusted to the socio economic patterns and
differentiations. Urban administration had its hierarchy of officers,
supporting supervision of production and exchange in urban centers,
presumably to control revenues.
7.3.3 Audit
The state, even those days, exhibited a closely controlled and orderly
financial accounting system.
The chancellor was responsible for collecting revenue from the whole
country, along with his delegates, the Governor Generals in each city.
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It was his duty to prepare the budget and maintain detailed accounts of
revenues and expenditures pertaining to all activities.
The governors and record keepers in every city were to keep records of
the number of people in each family, their gender, caste, family name,
occupation, income and expenditures pertaining to all activities.
Manufacturing establishments also kept a stock register showing the

purchases of all raw materials, the qualities of the same consumed in
production, stock changes due to materials; and a manufacturing costs
register showing expenditure on the labour employed and wages paid.
In the case of stores of all kinds, the record books showed the prices,
quality, quantity and description of the containers in which these were
stored.
The procedure of year-end Audit existed even then.
Thus, all individuals and establishments involved in manufacturing,

trading, retailing, and all such activities which engaged in monetary
transactions were subject to audits and scrutiny.
The Chief Controller and auditor was responsible for the maintaining the
record office where the accounts book showing, for each and every
business establishments in the market place, the nature of its activity and
total income received from it.
On the closing day for accounts, all the accounts officers were to present
themselves with sealed accounts books and with the net balance of revenue
over expenditure in sealed containers. The chief controller and auditor
would have the accounts thoroughly audited by the audit officers, who
would check the entries to verify net balances. The king would then be
informed of the audit results.
7.3.4 Accountability
Significantly, Kautilya was concerned, at least to some extent with

accountability.
For example, he recommended specifically the listing of revenue collected

from fines paid by government servants and gifts. He also wrote,
Expenditure will be classified according to the major Heads, as given
below: The Palace [expenditure of the King, Queens, Princes etc.],
He added, Every official who is authorised to execute a task or is

appointed as a Head of Department shall communicate [to the King] the
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true facts about the nature of the work, the income and the expenditure,
both in detail and the total.
7.3.5 Kautilya on the Creation and Preservation of Wealth
Kautilya identified quality of governance, human exertion, accumulation

of physical capital, acquisition of land, and knowledge as the sources of
economic prosperity.
He observed, Man, without wealth, does not get it even after a hundred
attempts. Just as elephants are needed to catch elephants, so does wealth
capture more wealth. Wealth will slip away from that childish man who
constantly consults the stars.
It is worth noting that Kautilya understood, by more than 2,000 years

earlier than Adam Smith, that accumulation of capital enhanced labour
productivity. Additionally, he emphasised productive activities.
Kautilya suggested, Hence the king shall be ever active in the

management of the economy. The root of wealth is economic activity and
lack of it brings material distress. In the absence of fruitful economic
activity, both current prosperity and future growth are in danger of
destruction.
A king can achieve the desired objectives and abundance of riches by

undertaking productive economic activity.
Kautilya was concerned not only about the creation of wealth but also in
the preservation of the existing wealth.
Kautilya wrote, In the interests of the prosperity of the country, a king

should be diligent in foreseeing the possibility of calamities, try to avert
them before they arise, overcome those which happen, remove all
obstructions to economic activity and prevent loss of revenue to the state.
In fact, he believed in the virtuous cycle of good governance, riches,

knowledge and ethical conduct. Accordingly, Kautilya put a very heavy
emphasis on good governance. Kautilyas definition of good governance
consisted of provision of infrastructure and national security, formulation
of efficient policies and their effective implementation and ensuring clean
and caring administration.
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7.3.6 Provision of Infrastructure and National Security
He understood the importance of infrastructure to the creation of

economic opportunities.
Kautilya suggested, Not only shall the king keep in good repair
productive forests, elephant forests, reservoirs and mines created in the
past, but also set up new mines, factories, forests [for timber and other
produce], elephant forests and cattle herds [shall promote trade and
commerce by setting up] market towns, ports and trade routes, both by
land and water.
He shall build storage reservoirs, [filling them] either from natural springs
or water brought from elsewhere; or, he may provide help to those who
build reservoirs by giving them land, building roads and channels or
giving grants of timber and implements.
He added, A king makes progress by building forts, irrigation works or

trade routes, creating new settlements, elephant forests or productive
forests, or opening new mines.
Kautilya wanted to maintain national sovereignty at every cost and by

every means available since its loss meant misery and squalor. He believed
that a country either would have both prosperity and national security or
lose both.
7.3.7 Sources of Revenue
He argued that both the provision of infrastructure and having a larger

army were dependent on tax revenue, which, in turn, was dependent on
the level of income.
Kautilya understood the importance of tax revenue. He wrote, All state

activities depend first on the Treasury. Therefore, a king shall devote his
best attention to it.
A king with a depleted treasury eats into the very vitality of the citizens
and the country. Kautilya suggested that a king start his day by receiving
reports on defence, revenue and expenditure.
Any government, which follows Kautilyas following principles of taxation,

will bring prosperity to the people and will never face financial crisis.
(i) He suggested ways to increase the tax base and not the tax rate to increase
revenue. He was against putting any excessive tax burden on the people.
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For example, he suggested for the king, He shall protect

agriculture from being harassed by [onerous] fines, taxes and demands of
labour. Similarly, he did not want the tax collectors to be overzealous and
collect only what was due.
He wrote, He who produces double the [anticipated] revenue

eats up the janapada [the countryside and its people, by leaving inadequate
resources for survival and future production].
(ii) Kautilyas insights into compliance issues are remarkable. According to

him, ignorance of the work, neglect of duty, timidity, corruption,
arrogance and greed on the part of tax officials were the main factors for
causing the loss of revenue. Clearly, Kautilya emphasised both honesty
and efficiency.
(iii) He noted that it was not easy to detect corruption. He stated, Just as it is
impossible to know when a fish moving in water is drinking it, so it is
impossible to find out when government servants in charge of
undertakings misappropriate money.
He added, It is possible to know even the path of birds flying

in the sky but not the ways of government servants who hide their
[dishonest] income.
Kautilya suggested heavy penalties on those officials, who

misappropriated revenue. He suggested, Those officials who have
amassed money [wrongfully] shall be made to pay it back; they shall be
transferred to other jobs where they will not be tempted to misappropriate
and be made to disgorge again what they had eaten. On the other hand
according to Kautilya, An officer who accomplishes a task as ordered or
better shall be honoured with promotion and rewards.
(iv) It appears that Kautilya did not recommend any punishment for bribing.
Since he considered the people more like victims. In fact, he suggested
compensating them for their losses.
He wrote, A proclamation shall then be issued calling on those

who had suffered at the hands of the [dishonest] official to inform [the
investigating officer]. All those who respond to the proclamation shall be
compensated according to their loss. That could be an effective way to
combat corruption since the person, who is forced to bribe might be more
than willing to provide some solid evidence against the corrupt officials.
The current law by treating both the giver and the receiver of bribes as
criminals unnecessarily protects the corrupt officials.
(v) He recommended that some enterprises, such as liquor sales, betting and
gambling be run by the Government to generate some surplus to
complement the tax revenue. He wrote, Income due to profit on sales;
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increase in the price of a commodity at the time of sale, profit from the use
of differential weights and measures and increased income due to
competition from buyers.
Kautilya would not, under any circumstances, have approved

the continued operation of public undertakings draining tax revenue by
generating huge losses.
7.3.8 Kautilya on Growth-oriented Government Expenditures
Two points are noteworthy. First, according to Kautilya, most of the tax
revenue should be used to the provision of infrastructure.
He wrote, The [total] salary [bill] of the State shall be determined in

accordance with the capacity [to pay] of the city and the countryside and
shall be [about] one quarter of the revenue of the State.
It implies that according to Kautilya, India will get more mileage out of
the tax revenue by constructing a few additional miles of highway than
squandering resources on overstaffed government offices and some
outdated and unproductive institutions/organisations, such as Planning
Commission.
Second, Kautilya emphasised the need for tax incentives to encourage

investment. However, those were very few and only for a very short
duration.
He suggested:
1. Tax Holidays: Anyone who brings new land under cultivation shall be
granted exemption from payment of agricultural taxes for a period of two
years. Similarly, for building or improving irrigation facilities,
exemption from water rates shall be granted.
2. Subsidised Loans: [On new settlements] the cultivators shall be granted

grains, cattle and money which they can repay at their convenience.
3. Exemption from Import Duty: Any items that, at his discretion, the Chief
Controller of Customs, may consider being highly beneficial to the country
(such as rare seeds) are to be exempt from import duties.
7.3.9 Kautilya on the Need for a Bureaucratic Set up
Kautilya had organized a huge and intricate network of bureaucracy to

manage the Mauryan Empire. This also reflected the centralized character
of the state Bureaucracy had thirty divisions each headed by Adhyakshas
(Chiefs).
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Reporting relationships were clearly specified. Kautilya had visualized the

necessity of state provision of public goods which strengthened trade and
commerce. The bureaucracy was involved in the provision of three of such
goods - the 'quality control machinery', the system of currency, and the
system of 'weights and measures'. Quality control was a revolutionary
concept for that era.
Kautilya understood the concept of bounded rationality and

consequently the need to set up a bureaucracy. He observed, A king can
reign only with the help of others; one wheel alone does not move a
chariot.
Therefore, a king should appoint advisers as councillors and ministers and

listen to their advice.
He assigned the role of executing kings orders to the ministers. He stated,

The ministers shall [constantly] think of all that concerns the king as well
as those of the enemy.
They shall start doing all that has not [yet] been done, continue
implementing that which has been started, improve on works completed
and, in general, ensure strict compliance with orders.
The king shall personally supervise the work of those ministers near him.
With those farther away, he shall communicate by sending letters.
Kautilya listed the responsibilities of a minister as: All state activities

have their origin in the minister, whether these be the successful execution
of works for [the benefit of] the territory and the population, maintenance
of law and order, protection from enemies, tackling [natural] calamities,
settlement of virgin lands, recruiting the army, revenue collection or
rewarding the worthy.
This suggests that Mauryan empire had an active trading sector and the
buyers (domestic and exports) were discerning. As a mark of quality,
merchandise had to be marked with the Abhigyan Mudra (state stamp) in
sindura (vermillion). Counterfeiting was strictly punished.
Bureaucrats received a fixed pay and were also eligible for state subsidized
housing. This is an example of Kautilya's deep understanding of statecraft
as even in later centuries (in other empires), officials were expected to
compensate themselves by retaining a part of revenue extracted from the
people (a kind of ad-valorem compensation). The ad-valorem arrangement
provided an incentive for the official to squeeze the tax payer as much as
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possible (a short term on the part of the bureaucrat) as the bureaucratic

tenure was not hereditary.
Kautilya, given his experience as a Chief Minister, probably realized the

peril of such an (ad valorem) arrangement and created a fixed pay
compensation structure for the bureaucracy. Huge bureaucracy invariably
results in a principal-agent problem.
Kautilya sought to tackle this issue through three means - elaborately

monitored standard operating procedures (SOPs), spies/intelligence
organization, and decentralization of authority.
SOPs minimized the room for subjective interpretation of the rules by the
bureaucrats. The superiors carefully monitored the performance of the
officials under their control. However this system of close monitoring must
have resulted in enormous transaction costs. It was therefore
supplemented by the intelligence organization which kept a watch on the
corrupt practices of the officials.
The exploits of the spies in catching corrupt officials were given wide
publicity and this made the officials careful in their dealings with the
citizens. Another measure to keep a check on the bureaucracy was
decentralized-polycentric political arrangements which resulted in
empowering of the local guilds. Thus the bureaucrats had to reckon with
an effective local power center that were aware of the royal edicts and
prevented the bureaucrat from substituting his/her objective function for
the royal edict.
It is interesting that Kautilya did not take recourse to ideology to

discipline the bureaucracy. Probably he realized that if a bureaucrat is
violating the SOPs.
Kautilya lists forty kinds of misappropriation of funds by the bureaucrats.

The informant giving information on corruption was entitled one sixth of
the amount as a reward. There is also a fascinating description of how the
departmental supervisors should check whether expenditures have been
incurred for the desired end - including the heads (labor, capital and
material) of the expenditure.
7.3.10 Kautilyas Approach to Elicit Honesty and Efficiency from

Bureaucrats
Kautilyas insights into human nature and how to design services and
sanctions to elicit honesty and efficiency from bureaucrats are
remarkable.
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He identified the problem of moral hazard (i.e., the problem of shirking)

and suggested payment of efficiency wages and supervision. He wrote,
The king shall have the work of Heads of Departments inspected daily,
for men are, by nature, fickle and, like horses, change after being put to
work.
Therefore, the King shall acquaint himself with all the details of each
Department or undertaking, such asthe officer responsible, the nature
of the work, the place of work, the time taken to do it, the exact work to be
done, the outlay and the profit.
7.3.11 Qualifications of a Councillor
Kautilya expected a councillor to be of impeccable character and with

unique qualities.
Kautilya wrote, A native of the country, of noble birth, easy to hold in

check, trained in the arts, possessed of the eye (of science), intelligent,
persevering, dexterous, eloquent, bold, possessed of a ready wit, endowed
with energy and power, able to bear troubles, upright, friendly, firmly
devoted, endowed with character, strength, health and spirit, devoid of
stiffness and fickleness, amiable (and) not given to creating animosities
these are the excellences of a minister.
According to Kautilya, a person must be a native of the country to qualify

for any powerful position. It requires no hard thinking in figuring out as
to how many of the ministers in the present scenario in our country, would
have been retained by Kautilya.
7.3.12 Kautilya Linked Pay to Performance and Qualifications
According to Kautilya, compensation should be based on qualifications,

experience and effort.
He recommended that the aggregate wage bill of the State should not
exceed one-fourth of its revenue.
Kautilya stated, Those who have all the qualities are to be appointed to
the highest grade (as Councillors), those who lack a quarter, to the middle
grades and those who lack a half, to the lowest grades.
He suggested, Salaries and wages of any individual employee, permanent

or temporary, shall be fixed in accordance with the above principles,
taking into account each ones level of knowledge and expertise in the
work allotted.
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Kautilya insisted on efficiency and honesty. Kautilya stated, Every man

shall be judged according to his ability to perform [a given task.
Caste system was not that rigid during Kautilyas times. For example, he
stated, Envoys therefore speak as they are instructed to, even if weapons
are raised against them. The shastras say that even if an envoy is an
outcast, he shall not be killed (1.16). Similarly, B.R. Ambedkar (1891-
1956) wrote, This country has seen the conflict between ecclesiastical
law. and secular law long before Europeans sought to challenge the
authority of the Pope.
Kautilyas Arthastra lays down the foundation of secular law in India;

unfortunately ecclesiastical law triumphed over secular law.
The following table may be used to express Kautilyas ideas.
Administration (Politicians and Bureaucrats)
Efficient Inefficient
Honest Most Desirable Moral Dilemma

Tolerable Least Desirable
Dishonest
(Table-K. Measurement of administration)
Kautilya insisted on efficiency and honesty for maintaining independence

and creating prosperity. He specified qualifications for each job. Although
he showed a lot of compassion for the disadvantaged but it is unlikely he
would have approved the quota system in any form or shape.
He advised that a king should take care of his subjects like a father takes
care of his children. He wrote, Whenever danger threatens, the king shall
protect all those afflicted like a father [protects his children].
He added, He shall, however, treat leniently, like a father [would treat his
son], those exemptions have ceased to be effective. Kautilya suggested,
King shall maintain, at state expense, children, the old, the destitute,
those suffering from adversity, childless women and the children of the
destitute women).
Incidentally, it may be noted that during 1950s there was both, honesty
and efficiency. Other than the police and the irrigation department, most
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of the employees were honest. Similarly, most of the politicians were

honest.
However, during the 1960s and 1970s, many bureaucrats and politicians
became corrupt but still relatively speaking were efficient. But over the
last 25 years, our Prime Minister and the President are all alone. A large
majority of bureaucrats and politicians are both inefficient and dishonest.
Kautilya relied on an efficient and honest intelligence service. Thus, in our

context, unless the investigating agencies like the CBI and the courts
functioned with due autonomy, honesty, efficiency and boldness,
improvement in governance would have no chance. The CBI should
investigate not only the past Chief Ministers but also the current Chief
Ministers, Income Tax Officers and many others, who are amassing
wealth at an unprecedented rate.
7.3.13 Judicial Fairness
Kautilya wrote, A king who observes his duty of protecting his people
justly and according to law will go to heaven, whereas one who does not
protect them or inflicts unjust punishment will not. It is the power of
punishment alone, when exercised impartially in proportion to the guilt,
and irrespective of whether the person punished is the Kings son or an
enemy, that protects this world and the next.
When there is a conflict between established tradition and ethical

principles, or between evidence and what is right (according to ethical
principles) the case shall be decided on the basis of ethical principles.
Where scriptural laws conflict with what is righteous and just, there
justice shall be the valid criterion; the written text loses its relevance.
He elaborated on this theme as thus: Whoever imposes just and deserved

punishment is respected and honoured. A well-considered and just
punishment makes the people devoted to dharma, artha and kama
[righteousness, wealth and enjoyment]. Unjust punishment, whether
awarded in greed, anger or ignorance, excites the fury of even [those who
have renounced all worldly attachments like] forest recluses and ascetics,
not to speak of householders.
When, [conversely,] no punishment is awarded through misplaced

leniency and no law prevails, then there is only the law of fish i.e., the law
of the jungle.
Kautilya did not view law to be an expression of the free will of the people.
Thus sovereignty - the authority to make laws, did not vest with citizens.
Laws were derived from four sources - dharma (scared law), vyavhara
(evidence), charita (history and custom), and rajasasana (edicts of the
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King). In case of conflict amongst the various laws, dharma was supreme.
The ordering of the other laws was case specific.
Rajasasana ordered the relationship between the three major social

groupings the citizen, the association, and the state. The constitutional
rules at the state level were specified in the rajasasana but the
constitutional rules at the level of the association were to be decided by the
members of the association. The collective choice and the operational level
rules of the association were also decided by the members of the
association though the state did promulgate laws to safeguard the
individual member from the tyranny of the majority in the association.
Arthastra outlines a system of civil, criminal, and mercantile law. For

example the following were codified: a procedure for interrogation,
torture, and trial, the rights of the accused, what constitutes permissible
evidence, a procedure for autopsy in case of death in suspicious
circumstances, what constitutes defamation and procedure for claiming
damages, valid and invalid contracts.
Regarding such, the Arthastra states that the maintenance of law and
order by the use of punishment is the science of government, and the
boundaries of what seemed to be valued by state ideology or dharma are
indirectly revealed in the Arthastra by the magnitude of punitive fines
attributed to unlawful deviations from the status quo.
Thus, dharma was the prime source of political legitimacy of the state and
it was one that was liberally tweaked by the Brahmin elites in furthering
their ends and practicing efficient statecraft. Regarding the instrumental
use of religion for political legitimacy value.
7.3.14 Governance- Role of Ethics
Kautilya was a sophisticated, foresighted and farsighted thinker. He

approached every issue methodically and comprehensively. He believed
that good governance was required to create opportunities and good
institutions, such as the rule of law, were essential for exploiting the
opportunities. He had deep insights into various aspects of good
governance: its role in creating prosperity, its comprehensive definition
and, above all, devising various measures for ensuring its delivery. He
proposed complementing the Vedic approach of building virtuous
character along with legalistic approach of codification of rules and
prescribing appropriate sanctions in case of their violation.
Kautilya used the word 'dharma' (which in general, means 'duty') and
righteousness in personal and social conduct. He described the basic
ethical (dharmic) values as, "Duties common to all - ahimsa (abstaining
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from injury to all living creatures); satyam (truthfulness); cleanliness;

freedom from malice; compassion and tolerance."
The concept of good governance is given by Kautilya which gets a lot of

attention in Western society especially in current times. The concept of
governance thereafter is attributed to Chandragupta Maurya and
Kautilya for two reasons. Firstly, they successfully drove away the Greeks
and destroyed the myth about Greek superiority. Secondly, Chanakya
wrote, among others, a great treatise called Arthastra, having chapters
on the King, the well organised State, Treasury, Sources of Revenue,
Accounts & Audit, Civil Service Regulations, Law & Justice, Foreign
Policy, Defence & War, etc.
The Arthastra is a manual for practicing politicians. Kautilya

prescribed specific, tested administrative procedures.
An important part of that was coercive authority (danda, which literally

means a stick) when officers do not meet their task or if citizens not obey
the rules and regulations. He conceived danda to be the surest and the
most universal means of ensuring public security as well as the stability of
the social order. He contemplated the universal application of danda
irrespective of the offenders rank and status.
He was aware of financial fraud committed by the government officials.

Government officials could enrich themselves either by cheating the
government or by exploiting the public. He prescribed punishment for
both types of fraud.
If Profit was a must in his scheme of running public enterprises. An

official who did not generate adequate profits in crown undertakings was
punished.
Kautilyas theory of the recruitment and selection of officials involved

tests to judge officials before appointing them. According to him the civil
servants needed to be watched and guided so that they did not misuse their
position. The candidate who applied for a position was tempted by
different means through secret agents.
Kautilya developed the wealth tests, the virtue test, the pleasure test and
the fear test. Those who passed all four tests were appointed as ministers.
The Arthastra explains in detail the principle of righteousness in
management, politics and stated it to be the essence of being a King.
The institution of state is created to enable the individual to practice his

dharma and thus move towards the emancipation from the cycle of death-
rebirth. The condition of arajat (lawlessness) was viewed with distaste as it
militated against the practicing of dharma.
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There is reference in many ancient Vedic texts to Matsya-Nyaya (Law of

the Fish) which prevails in the state of nature. Such a state is characterized
by the absence of dharma and mamatava (private property rights).
The four ashrams (orders) are Brahmacharya (student hood, emphasis is

on abstinence and on acquiring knowledge), Grihastya (married life,
emphasis is on bhog (enjoyment) of material pleasures), Vanaprastha
(retiring to woods for meditation), and Sanyas (asceticism).
Vedic philosophy does not encourage asceticism for anyone of any age.
Kautilya, a firm believer in the ashram system, was opposed to such
pseudo-asceticism. Arthastra prescribes strict penalties for citizens who
take up sanyas (asceticism) without sufficiently providing for their
families.
Kautilya believed that this was socially destabilizing as if everyone became

a monk then who shall run the society.
In political texts, especially the Arthastra, dharma has been interpreted

in terms of law, justice and duty. Thus according to the doctrine of
dharma, state is a law giving, justice dispensing, and duty enforcing
institution.
Confucius civilization, in contrast to the Vedic Civilization, views law and

order to be an intrinsic part of nature and not a creation of the human
entity. Thus if anarchy exists, it is attributed to violation of filial piety (a
natural law) by human beings.
Vedic civilization sanctified individual property rights. The King was not
even the notional owner of land. He was a protector of land for which he
had the right to levy taxes.
This conceptualization of the relationship between the King and the citizen
is in contrast to the belief system in civilization where the emperor was the
notional owner of the land. Hence in the Confucius civilization, the tillers
of land didn't pay tax - they paid a rent to the State, which wields the
instruments of coercion (danda), is constituted to get the society out of this
quagmire. Thus the state enables two things - the practice of dharma and
the bhog (enjoyment) of private property rights.
The Vedic state can be viewed as "qualified monism" in which the

autonomy and the diversity of the various social groups residing within the
boundaries of the state were recognized. Citizens had multiple loyalties - to
the state as well as king.
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The question is, do we always need an external authority to wield the

'sword' or are the human communities capable of evolving and sustaining
such capabilities themselves? Kautilya would have argued for the necessity
of both the internal and the external sword - to be used for different
purposes. The legitimacy for both the swords, in the Vedic conception,
would come from the same principle - the pursuit of dharma.
The Vedic civilization sought to tackle the free rider problem through the
institution of 'danda'.
Kautilya realized that the moral imperative - dharma, alone could not
prevent free riding. Hence a system of coercion and sanctions -danda,
needs to be in operation.
The causal nexus between the state of nature and breakdown of a social
order, as described in the ancient epic of Mahabharata, is as follows :
Then foolishness or stupidity (moha) seized their minds. Their
intelligence thus being eclipsed, the sense of justice (dharma) was lost.
Cupidity or temptation (lobha) overpowered them next.
Thus arose the desire (kama) for possessing things not possessed. And this
led to their being subjugated by affection (raga) under which they began to
ignore the distinction between what should and what should not be done.
Consequently there appeared sexual license, libertinism in speech and diet,
and indifference to morals.
Dharma, on the other hand, has an appeal across deities. Its non-
contestable character therefore served as a useful attribute for the
legitimization of the state.
These associations related to the guild were knit together on the basis of
two principles - military imperative (strength in unity) and the principle of
dharma.
These bodies had well specified rules of governance and a code of conduct.
They zealously guarded their autonomy and the King could not trample
on their customs and traditions.
To ensure that the King and the associations do not overstep their
respective limits, the Superintendent of Accounts had to codify the history,
the customs, and the traditions of every association.
However, the relationship between the individual body and the state was
not of competition or of turf protection. Both the bodies had a role to play
in enabling the citizen to follow his dharma. Interestingly, there was a
Department of Commissioners to protect the interest of the individual in
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the association. Thus there was a mechanism to protect the individual

from the larger association and the association from the State.
The King was looked upon an embodiment of virtue, a protector of

dharma. He too was governed by his dharma as any other citizen was. Thus
if any actions of the King went against the prevailing notion of dharma,
associations and/or the individual citizens were free to question him. King
was not the sole interpreter of dharma.
Kautilya considered moral values as a means to prosperity in this world

and to paving the way to heaven after death.
He asserted, For the world, when maintained in accordance with the

Vedas, will ever prosper and not perish. Therefore, the king shall never
allow the people to swerve from their dharma. He added, For, when
adharma overwhelms dharma, the King himself will be destroyed.
The insights contained in The Arthastra are as relevant today as they

were in his time and thus making it an ageless contribution.
He truly possessed a modern outlook in formulating such universally

relevant principles.
According to Kautilya, so long as no effective remedy, legal or political, is

devised to contain the extra ordinary tactics of the corrupt elected
officials, India could not achieve her full potential. Since corrupt officials
encourage socially unproductive, rent-seeking activities, distort the
incentive system and discourage honesty, efficiency and hard work.
Second, Kautilya pointed out that one should always keep in mind that
sometimes the effects of a policy might be irreversible, and therefore one
should be farsighted as well as foresighted in formulating a policy.
Third, Kautilya proposed efficient, mutually reinforcing and consistent

formulation and coordination of fiscal, labour, trade, judicial and foreign
policies to promote prosperity, national security and fairness.
His systemic approach should be used as the basis of current reforms in

India. For example, according to him, economic efficiency depended on
appropriate economic (including international trade) policies, judicial
fairness, and ethical values.
Therefore, along with economic reforms, judicial and political reforms

might be necessary to achieve economic efficiency. How can a nation
achieve economic efficiency when there are hardly any meaningful
sanctions against economic crimes, such as tax evasion, adulteration,
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bribery, and extortion? Justice to a large extent is for sale and may be
labelled as green justice.
Fourth, according to Kautilya, maintenance of law and order was a

prerequisite for creating prosperity. He observed, By maintaining order
the king can preserve what he already has, acquire new possessions,
augment his wealth and power, and share the benefits of improvement
with those worthy of such gifts. The progress of this world depends on the
maintenance of order and the [proper functioning of] government.
Kautilya added, Government by Rule of Law, which alone can guarantee

security of life and welfare of the people, is, in turn, dependent on the self-
discipline of the king.
Also, according to Kautilya, every important task must get an undivided

attention. For example, he stated, If the [amount of actual cash in the]
treasury is inadequate, salaries may be paid [partly] in forest produce,
cattle or land, supplemented by a little money.
However, in the case of settlement of virgin lands, all salaries shall be paid
in cash; no land shall be allotted [as part of the salary] until the affairs of
the [new] village are fully stabilised.
Clearly, according to Kautilya, supervision of a settlement of virgin lands

required undivided attention. He reasoned if the officers were allowed to
work on the land, most likely they would have spent very little time on the
official duties and disproportionately more time working on the land, and
thus, ignore their primary responsibilities.
The Deputy Commissioner of a district, who has a longer list of

responsibilities than perhaps that of God, should be concentrating just on
maintaining law and order, which has been worsening over the years.
Moreover, the private sector (including the farmer) has become quite
entrepreneurial and the many layers of State officials are there to create
only hurdles in the developmental work. In fact, many other offices need a
review.
For example, the only role State Governors seem to play is to destabilise
democratically elected governments. A Chief Judge of the high court can
perform the oath taking ceremony. Unfortunately, these bureaucratic
structures are more durable than the stainless steel structures in India.
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7.3.15 Conceptualizing Good Governance
The Arthastra equates political governance with economic governance.

The end is economic governance while political governance is the means.
But as economic objectives are not realised in the absence of political ones,
then political governance becomes an end and economic governance the
means.
'The end justifies the means', this is supposed to be the basis of Kautilyan
and Machiavellian philosophy. Political power and material wealth
according to Kautilya are the means and ends of governance.
And good governance - political or economic - depends upon justifying the

ends and means as the socio, economic and political conditions.
The three constituents of power are: intellectual power, military might,

and enthusiasm and morale.
7.3.16 Principle of Trading
Trade was a controlled process in Medieval India. Commodities and

products could not be sold in the places of their production; but where
sold only at designed markets or brought into the city and sold after
payment of a duty.
The sale of all commodities belonging to the crown was centralized, i.e.
conducted only at a specific location, generally the center square in the
market place in the city.
The officers in charge of sale of these crown commodities would deposit

the proceeds in a wooden box; and at the end of each day of sale, they
would hand over the money box, the balance stocks, and their weighing
and measuring instruments.
Certain merchants were also authorized by the state of sell commodities in

the market place at prices fixed by the chief controller of state trading.
When commodities existed in excess supply, the chief controller of state

trading would have the authority to build up buffer stock by paying a
price higher than the market price.
When the market price would reach the support level, he would change
the price according to the situation.
Prices could not be fixed taking into account the investment, the quantity
to be delivered, duty, interest, rent and other expenses.
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The chief controller of state trading would ascertain the profitability of a

trading operation with a foreign country, in order to allow exports of
commodities and sales abroad.
The price of goods to be sold and the gains thereof would be estimated and
weighed against those obtained through domestic trade, in order to
sanction the exports.
The state provided encouragement to traders dealing in the sale of

imported goods which were needed.
Merchants, foreign and domestic, who brought in foreign goods by

caravans or by water routes, enjoyed such incentives as exemption from
taxes, and higher profit margins, and immunity from lawsuits.
The profit margins allowed to merchants would be on the order of five

percent for locally produced goods and ten percent for imported goods.
Imported goods were sold in all possible places and made readily available
to people in the towns and countryside, in order to improve the peoples
living standards and quality of life.
Import and sale of foreign goods was encouraged in order to make them
freely available through state-approved channels all over the country.
Trade both foreign and domestic, was encouraged as it constituted a

considerable portion of the state revenues.
Trade was partly in the hands of officials and party in those of

shopkeepers or travelling merchants.
The Arthastra prescribed that profits be shared equally among

workmen who labored together toward common goal. However
proportionally in sharing of earnings would be applied when division of
labour existed.
So officials and employees who shouldered higher responsibilities were

entitled to higher earnings in proportion with their status and work
patterns.
As now traders and merchants in those days were often mistrusted. Their
propensity to fix prices by forming cartels, make excessive profits or deal
in stolen property was guarded against by making these offences
punishable by law.
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Kautilya emphasized honesty and justice in trading. He recommended

heavy fines for traders who would collude and fleece buyers by conspiring
together to hold back wares and later sell them at higher prices.
The chief controller of Private Trading kept a watch over merchants, by

inspecting periodically their weights and measures and ensuring that they
did not hoard merchandise, adulterate foods, or excessive mark-ups.
Trust and confidence in the measurement system, i.e. the weights and
measures, and also protection against counterfeiting of coinage, was
necessary to ensure that states integrity of commerce.
Private enterprises were allowed to run side by with state controlled

traders; however private traders were looked upon with suspicion by the
people, and taxed and fined severely by the state, if indicted with
malpractice.
7.3.17 International Trade
The importance of international trade is emphasized by Kautilya in that

he advises the sovereign that foreign relations should be guided strongly
by trade considerations. He counsels that relationship with southern
kingdoms is to be favoured over those with northern kingdoms because
the southern kingdoms possess greater mineral wealth. As he puts it
Possessing immense gold is better than a friend ruling over a vast
populationfor armies and other desired objects can be purchased with
gold. Kautilya also advantages attracting foreigners who possess good
technical and other economic development of the realm.
Kautilya clearly recognizes that imports represent a very important way

in which the wealth of the realm can be increased, in that imports can
provide the kingdom with products which are either not available
domestically or can be obtained by more cheaply from foreign sources
through trade than through domestic production. Kautilya fully realizes
that exports are nor important than imports as a means for enhancing the
kingdoms wealth.
Kautilya clearly formulates a comparative advantage view of international

trade patterns by stating that it is mutually beneficial to the various
kingdoms when the products being imported are cheaper than those that
can be obtained domestically and will fetch higher prices to the exporter
than can be gotten in domestic markets.
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7.3.18 Imports and Exports Activities
International trade has always been essential element of trade. India

shares borders with several countries and was accessible through several
routes which were paved for trading commodities.
Kautilya's policies, when seen in totality, represent a very pro-merchant

and artisan stance, with the State playing the role of facilitator and
protector of commercial interests.
Marketing activities for import/export purposes required establishing

contacts with foreign trades and shipping/receiving goods via these trade
routes.
The state employed officers who traveled to foreign lands as its dignitaries.
They studied the buying and selling activities and consumption patterns of
merchants and customers in foreign markets, and recognized potential
markets for sale of indigenous goods.
Thus market research activities were prevalent then. Commerce relations

were built with diplomats from overseas for exchanges of commodities.
Effective intelligence would allow a state to carefully weigh the odds of

foreign and domestic policy measures, and skilfully apply the principles
underlying the text.
Intelligence was the prerequisite for applying strategy, internally through

secret service or externally through espionage and psychological warfare.
The Mauryan government built ships and let them out on hire for
transport of merchandise.
Traders had to pledge their assets like their homes or lands as collateral
when hiring ships for transporting their goods. The fair value of the goods
being shipped into or out of the country was quoted by the state, and the
merchants were assessed the hiring fee which was to be paid upon return
of the vessels.
Goods traded were classifies into three kinds; those produced in the
countryside, those produced in the city and those imported from other
countries. All three types of goods were liable to payment of customs duty
whenever they were imported into the city or exported from it.
However customs regulations were such that duty would not be imposed
on certain goods as such as those intended for gifting at wedding
437
celebrations, goods intended for religious rituals or worship of the gods, or

those items, at the discretion of the chief controller of customs, which were
considered beneficial of the state.
The frontier office had the vested authority to inspect the caravans
carrying foreign goods and classify the goods as those of high value or low
value based on nature of the products and the value quoted for each of
them by their respective merchants.
The packages would be sealed with the official seal and identity papers
issued to the merchants, along with the appropriate cess.
All details about the caravans and their associated consignments would
then be communicated to the chief collector of customs.
On arrival at the city gates, the collector and his office would inspect the
caravans and make his appraisal on the basis of information received from
frontier officers, spies or the king. Goods enjoying exemption from
payment of duty would be allowed in.
All dutiable goods would be weighed, measured or counted and the duty
payable on them would be collected at the course of entry.
Penalty would be levied on violators who tried to cheat or escape payment.

This system of inspecting goods twice was enforced in order to ensure that
merchants did not sell their products at any location other than the
market place, which was the sole center designated by the state for buying
and selling of goods.
Also sale at the market place alone would ensure that merchants did not
make access profits, as they would be continually subject to scrutiny by
the law.
After payment of duty, a merchant would typically enter the market place.
He would place himself near the custom house and declare the type,
quantity and price of his goods.
He would call out for bits three times and sell to anyone who was filling to
buy his products at the price demanded. If there was competition among
buyers and a higher price was realized, the difference between the call
price and sell prize alone with the duty their own would go to the treasury.
In this manner, the market system was established such that traders would
only pocket the fair returns on sell of their merchandise, and any
additional or incremental revenues resulting there upon would be directed
only towards the states coffers.
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7.3.19 Wholesaling and Retailing
Retailers played significant role in trading activities. Retailing generally

involves all activities involved in selling goods or services directly to final
consumers for their personal, non-business use.
An agent selling goods on behalf of another party was paid on a

commission basis. He would hand over to the proceeds of the sale to the
original owner of the merchandise, and his receive commission in return.
Thus this agent played the role of an intermediary like a wholesaler or

retailer in a marketing channel.
Increased sales, with higher profits, meant more commission for the agent,
which served as an incentive for him to market the products better and
sell more of them. If the price realized was lower because of missing the
best opportunity for sale, the agent would pay the owner the cost of goods
at the time he received them and normal profit.
Whenever no profit was made, the retail seller would pay to the wholesaler
or the owner of the commodities only the price of goods. If the price fell,
between the time of entrusting the goods and the time of sale, only the
lower price, actually realized would be payable.
In case of goods sold abroad and those sold after a lapse of time, the
amount payable would be reduced by the expenses and losses, if any.
This pattern of business shows that there were wholesalers, retailers, and
direct marketers in their trade channel.
Goods which were sold by the producers themselves in the market place
exhibit a pattern of direct marketing. Agents played the role of retailers,
selling goods I the market without assuming the title of the goods.
Merchants, who bought goods from foreign manufacturers and

transported them in caravans and ships to market place, sold these goods
in the market at the fair price and pocketed the earnings.
This is similar to modern marketing channels of distribution where

wholesalers assume title and ownership of goods from their producers and
then sale these goods in the market at their price.
Brokers and middlemen, did play their role too in trade, even in those
days; however they were always looked upon with skepticism and hence
controller was to watch over their activities. These brokers, played only
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the role of intermediaries for passage and sale of goods in the open
market, but never claimed title or ownership of the goods that they were to
sell on behalf of the producers; just the way it is done today.
The Chief controller of Private Trading was responsible for fair trading
in old and new articles, and would allow the sale or pledging of old articles
only if the seller or mortgagor could provide proof of ownership.
He would ensure that merchants do not count the brokerage paid to

middlemen as part of their costs. He would allow brokers to hold stocks of
grain and other commodities only to the extent authorized, and confiscate
stock in excess of those limits, to forward it for fair direct sale in the
market.
7.3.20 Role of Warehousing
Warehousing has always been a vital function of businesses, as it was

necessary to care for the upkeep and maintenance of stored goods and
commodities.
The Chief Superintendent of Warehouses would be in charge of granaries

and warehouses for fats and oils, sugar and honey, salt, vinegars, fruit
juices, sour liquids, spices, dried fish, dried meat and vegetables; and
cotton and flax. These were basic items and amenities necessary for
survival of the population; hence their preservation was imperative for the
state.
This shows that warehousing was an important function for sustenance

and business.
The Superintendent would keep an account of all commodities received

into the warehouses, and duty classify the inventory held in there as
revenue received from taxes, exchanges on barter basis, borrowings, aid,
labor, gifts to the king, surcharges or miscellaneous receipts.
He would have the foresight and authority to sanction use of only the
current stock at any time upon demand by the state, and preserve half the
stock for reserve in times of calamities and emergency; he would exhaust
moving stock, and regularly replenish old stock with new.
During the Maurya reign, villagers were encouraged to have their own
emergency stocks. Thus the population and the state exhibited foresight
and planned for contingencies by practicing well the warehousing function
of marketing.
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7.3.21 Role of Transportation
Transportation has always played an important role in trade.

Transportation constitutes a vital marketing function, as it involves the
physical distribution of goods from production sites to warehouses and
markets.
It is intriguing to know that even in ancient times; this function was given
great importance, and was controlled closely.
Prior to the medieval era, items would be manufactured close to the

sources of raw material, and artisans would gather there from
surrounding areas.
However as trade routes widened during the Maurya regime in the

medieval period, development of roadways for inter-regional exchange
activities of commodities started gaining impetus.
With interconnections of road ways and sea-routes, there was a greater

dispersal of craftsmen, with many gathering in centers where there were
markets.
Exchange of goods of various trades, from food and clothing to metals and
mining, was facilitated over long distances.
As market mechanisms emerged in the medieval Indian setting, wherein

demand and supply patterns of goods began influencing prices,
transportation of goods and commodities was facilitated through building
and maintenance of roads and waterways for importing and exporting.
Transportation of goods and commodities by sea and land was an essential

function of the state.
The chief controller of shipping had a wide range of responsibilities-

supervising maritime safety and rescue, running shipping services, hiring
ships and boats with or without crew, organizing ferries, controlling the
movement of foreign merchants, collecting revenue such as road cess,
customs duty and ferry charges, and ensuring security by keeping a watch
over undesirable persons using the ferries.
The chief controller of state trading had to be conversant with the details,
pertaining to all state monopoly commodities, such as the public demand,
price fluctuations, and relative prices of high and low value goods, and the
optimum time for buying, selling, stocking and disposal.
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Several merchants and traders were also involved in transporting

commodities via caravans and ships. Toll had to be paid on the movement
of merchandise from one place to another.
7.3.22 Consumer Rights
Marketing management has often stressed the customer being right.

Organizations operations and marketing campaigns are geared towards
producing and maintaining satisfaction and welfare of consumers.
Kautilyas Arthastra talked about consumers rights. In Arthastra,

there are references to the concept of consumer protection against
exploitation by the trade and industry, short weights and measures,
adulteration and punishment for these offences.
The law dealt severely with businessmen providing products or rendering

services to consumer for a fair price, and any misdemeanor conducted by
these businessmen would be subject to punishment of varies kinds by the
state.
The reprimands would range from being humiliated in the market square
and payments of fines in monetary value increasing with degree of the
offence, to extreme punishments like lashing and whipping.
Thus, even in that era, and essential aspect of the welfare of the
population was the protection of the interests of the consumer.
The Arthastra prescribed it the fundamental duty of the ruler to look

after the welfare and benefits of the subjects.
It required the ruler to protect his citizens, including the peasants, whom
Kautilya correctly believed to be the ultimate source of the prosperity of
the kingdom.
Acting on Kautilyas advice the king, during famine seasons, would show
favor to his people by providing them with seeds and provisions stocked
by the state in the regional and village granaries.
He would distribute portions either from his own collection of provisions

or from the hoarded income of the rich.
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7.3.23 Monopoly
The notion of monopoly existed even then, with certain producers being
granted exclusive rights to sell their respective wares in the market.
Monopolistic firms would be those individual traders dealing exclusively

in the marketing and sales of certain commodities which would be
available in the market only through them.
Profits margins on the sale of monopoly goods were a significant source of

revenue. The monopoly tax was collected by the state, in the form of
license fee, whenever a private manufacturer of trader of a state monopoly
item was granted permission by the state to sell.
This was under the control of the chief controller of state trading who was
responsible for orderly marketing, maintain buffer stocks, avoiding
excessive profits and collecting transaction taxes.
Private trade was not encouraged for most commodities, except very few
goods which were not indigenously available, as the state was anxious to
preserve its lucrative monopolies. Prices were controlled.
7.3.24 Role of Contracts
The concept of contracts and contractual agreements had its significance

in society, and was subject to the law.
Any contract entered into by anyone with others of his own class,
community or group would be held valid, provided that the contract was a
concluded in a suitable place and at a suitable time, observing all the due
formalities, including the presence of witnesses, and further provided that
all the details of the object of the contract, such as appearance,
distinguishing marks, quality and quantity were properly noted down.
7.3.25 Elements of the State and Role of a King
Arthastra conceptualizes the state to have seven elements
1. Swami (Monarch)
2. Amatya (Officials)
3. Janapada (Population and Territory)
4. Durga (Fort)
5. Kosa (Treasury)
6. Bala (Military)
7. Surhit (Ally)
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The cardinal principle of economic administration was laid down in

Kautilya's Arthastra in the following words - "The root of wealth is
economic activity and lack of it brings material distress. In the absence of
fruitful economic activity, both current prosperity and future growth are
in danger of destruction. The King shall populate the countryside by
creating new villages on virgin lands or reviving abandoned village sites."
King derived his power from three sources - Prabhushakti (the power of
the army and the treasury), Mantashakti (advice of wise men, specifically
the Council of Ministers) and Utsahshakti (charisma). Mantashakti was
rated as the most potent source followed by the prabhushakti and
utsahshakti.
Clearly Kautilya believed in the importance of institutions (Council of

Ministers) and not of an individual (King) for governing the state.
The Vedic King was not an absolute monarch - he was certainly not a
'mortal god'. He was a protector of dharma but not the sole interpreter of
it. He governed on the basis of the advice of the Council of Ministers.
Further, the numerous autonomous associations which constitute his
kingdom were also an effective check on his power.
Kautilya had organized a huge standing army financed directly by the

treasury. Organization of a standing army is a major factor in centralizing
the state apparatus. When the King is dependent of the subunits or the
guilds for the army manpower, he has share power with them. Kautilya, a
believer in centralization, realized that a strong standing army was a pre
requisite for a strong monarchial state.
Next to the King came the Mantri Parishad (Council of Minister). King
was enjoined to discuss each and every matter with the Parishad as it
represented the distilled wisdom of the society. Parishad had two levels -
the Inner cabinet and the Outer cabinet. The Inner cabinet had four
members - The Chief Minister, the Chief Priest, the Military Commander
and the Crown Prince. The Crown Prince was included to ensure smooth
succession and to maintain continuity in case of emergencies. The
membership of the Outer cabinet was not fixed in number. Invariably the
heads of the prominent guilds were co-opted in this body. This gave a
representative character of the Parishad.
Kautilya glorified the State and viewed the office Kingship to be the
embodiment of all legal and moral authority associated with the institution
of the state.
The King was an intrinsic part of the social order and by the nature of his
office, a defender of that order. However King was to regard himself as an
agent of the people and had to abide by his dharma as laid out in the
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Sastras. The institution of the Kingship was sacred but not the person who
happens to hold it.
7.3.26 Principle of Taxation
Kautilya visualized a 'dharmic social contract' between the King and the
citizens.
Kautilya's discussion of taxation has several underlying principles - the

taxing power of the state should be limited, tax should not be felt to be
heavy or excessive, tax hikes should be introduced gradually, tax should be
levied in the proper place, time and form, and tax level should be equitable
and reasonable.
Ideally, the government should collect taxes like a honeybee that sucks just
the right amount of honey from the flower so that both can survive.
Kautilya's scheme of taxation involved the elements of sacrifice by the

taxpayer, direct benefit to the taxpayers, redistribution of income (the
state took care of the poor), and tax incentives for desired investments.
In regard to taxation, the Arthastra advises prudence, balance, and

proper timing.
Taxes were levied for maintenance of the social order and for the state run
welfare apparatus.
1. According to Kautilya, When people are impoverished, they become

greedy; when they are greedy, they become disaffected; when disaffected,
they either go to the enemy or kill their ruler themselves.
2. According to Kautilya, not only the king should be honest and efficient but
his administration also should have those qualities.
3. He suggested, Thus, the king shall first reform the administration, by

punishing appropriately those officers who deal in wealth; they, duly
corrected, shall use the right punishments to ensure the good conduct of
the people of the towns and the countryside.
4. The following table may be used to express Kautilyas ideas.
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Interdependence of Ethical Conduct
Administration
Honest Dishonest
ideal case- I
Honest unstable case- II
Public worst case IV

Dishonest unstable case III
(Table-L. Interdependence of Ethical Conduct)
Thus, according to Kautilya, either both the public and the administration
were honest or both were dishonest. If the administration squandered the
tax revenue, why would the taxpayers be honest in paying their taxes?
Similarly, why would the administration be honest if the taxpayers
cheated on their taxes? Kautilya tried hard to avoid Case IV.
He understood the disastrous consequences since that was harmful both to

economic growth and national security by creating political instability and
tempting an enemy to attack the kingdom. Kautilya did not discuss Case II
and Case III, perhaps realising that those were transitory.
In case of aggression by an outside agency, the janapads (districts) could

ask for tax remission as the King had failed in his duty to protect the
citizens.
Kautilya realized the critical role of the tax system for ensuring the
economic wellbeing of the society. The hallmark of his tax system was
'certainty' - of time, of rate and of the mode of payment.
Stability in the tax regime was an important factor in ensuring active

trade and commerce in the Mauryan Empire. This in turn strengthened
the revenue base of the state and enabled it to maintain a huge standing
army and the welfare apparatus.
State was overzealous in collection of taxes and tapped virtually every

source. Citizens paid a toll-tax. Farmers (household as the unit of
assessment) had to pay one sixth of the produce as the land tax. There was
a land census at periodic intervals and land records were scrupulously
maintained. This data base enabled the assessment of the taxable capacity
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of the household. Traders had to pay one tenth the value of the
merchandize as tax. There was an entry tax to enter the fort, tax on use of
roads and waterways, and for getting a passport. Even the hermits living
in the forest had to part with one sixth of the grain gleaned by them as
they too needed the protection of the King. Service industry was also taxed
- actors, dancers, soothsayers, prostitutes, and auctioneers were subjected
to taxation. Pilgrims had to pay a Yatra Vetna (pilgrimage tax). Citizens
had to pay a tax (Pranaya Kriya) for the acts of benevolence.
Many sources of public revenue are considered by Kautilya. Kautilyas

systems of taxation are very comprehensive but some of the ideas
expressed about taxation in Arthastra predate it. Many of the principles
of taxation that he outlined are still in favour today, as a perusal of
standard texts on public finance. Kautilya identified and discussed the
many sources of state and concludes that the State was zealous in the
collection of revenue from all possible sources so that the wealth so
accumulated might be spent on the protection of the State from external
and internal changes, and on social services and productive enterprises, as
building of forts, roads, plantation of colonies, of villages, asylums,
orphanage and educational institutions.
Furthermore, during Kautilyas time, the king had responsibility for food
security. Agricultural stocks were kept in the Royal granaries to ward off
public distress, and the king.
7.3.27 System of Spies
The Arthastra cherishes strategic means for achieving political and

economic ends because of its inherent efficiency strategy meant leverage.
The presumably large scale of the state economy idealized in the
Arthastra a necessitated abundant use of covert operations in order to
defend against external threats and quell internal dissension.
Kautilya was a product of the age of intrigue. He defeated Alexander of

Macedonia and the Nanda king (most powerful Indian empire of that era)
on the basis of military prowess and political craft.
According to Kautilya, the King has to guard against intrigues from

internal and external sources. Internal sources include the inner cabinet,
the autonomous associations/ guilds, religious orders and the personality
of the king himself (atma-dosa). External sources refer to hostile foreign
powers.
The intelligence apparatus was very elaborate and had infiltrated virtually
every institution and profession - especially the institutions of mass
participation like religion.
447
Spies could be under the following guises - kapatika chhatra (fraudulent

discipline), udasthita (recluse), grihapalka (householder), vaidehaka
(merchant), tapas (an ascetic practicing austerities), satri (a classmate),
tikshna (a fireband), rasada (a poisoner) and a bhikshuki (a mendicant
woman)
Monks and the sanghas (association of monks) were actively used for the
purpose of gathering intelligence. Kautilya even suggested that to
assassinate a rival King, weapons may be kept inside an idol and be used
when the King comes for worship.
Thus Kautilya did not hesitate to use the institution of religion for the
purpose of statecraft. For him, the most important condition for the
practice of dharma was not the institution of religion but the institution of
the state.
Intelligence operations were greatly aided by the maintenance of a

'national citizen register' and a system of passport and visa. Register was
updated by regularly conducted censuses and by the compulsory
registration of the births and deaths.
The Arthastra recommends the use of young women of great beauty,

or courtesans, to seduce and become intimate with rival military leaders
and political officials so as to set the stage for provoking quarrels amongst
them or inducing assassination.
Similarly, deceptive means are undertaken to ensure loyalty and

immediately quell any dissension within the state.
7.3.28 Importance of the Treasury
Kautilya paid supreme importance to the maintenance of a rich treasury,

which favorably affected entire activities of the administration. It was
pointed out that the augmentation of the treasury depends mainly on the
abundance of harvest, opulence of industrial production (Prachara-
Samirddhi), prosperity of trade and commerce (Panyabatulya) as well as
good fiscal management. Therefore, Kautilya paid much attention to
good fiscal management and methods to develop all the sectors of
economic activity just mentioned. It was both in the interests of the king
and of his subjects to develop all avenues of economic activity. Public
finances were, amongst other things, to be used to defend the realm,
ensure peace at home and to dispense justice and to provide support for
the development of economic activity.
At the same time, Kautilya advised the king to limit his expenditure on
servants. This should be kept to less than a quarter of his total revenue.
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Kautilya says: In accordance with the requirements of his parts and

country parts, the king should fix under one-fourth of the total revenue
the charges of maintaining his servants. He should not violate the course of
righteousness and wealth. In essence, the treasury does not exist for the
pleasure of the king but as a fund to be wisely utilized to increase the
wealth of the nation.
The treasury received income from industries under state control

(prostitution, alcohol, and gambling), taxes and tolls, service charges,
fines, special levies, and voluntary contributions and sale of royal honours.
7.3.29 Agriculture, Industry, and Commerce
Agriculture, cattle breeding and trade- are called Varta.
Varta is the most useful to the world because of it brings grains, animals,
copper, gold and forest production.
(7-1. Various Agriculture Products)
Varta is source of treasury and king can control the enemy because of
Varta.
There are four sciences; there is inclusion of all that concerns

righteousness and wealth as Kautilyas view.
The main activities of the economy were agriculture, cattle breeding and
commerce. Among the three, Chanakya considered agriculture to be the
most important constituent of the economy. Its a fact that the Indian
economy of today is an agro based one.
As mentioned above Kautilya is keenly aware that Treasurys fortunes

depend on the development and economic productivity of the nations
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industries. He, therefore, outlines measures for the development and

improved management of mines and forests, agriculture and livestock,
manufacturing, and commerce. Although he sees traders as relatively
unproductive, he is very aware of the importance of commerce and trade
as a contributor to economic welfare and as a source of government
revenue, and proposes several measures for regulating commerce, often
with a view to extracting increased taxes.
He urged the sovereign to invest in transport infrastructure, particularly

roads, possibly because this would foster trade and commerce thereby
raising state revenues, facilitate internal administration of the nation, and
assist in defense of the realm. Furthermore, commerce was promoted by
the use of money, and standard weights and measures, and these in turn,
also assisted efficient public administration and finance.
In the economic systems of Kautilyas time, the king (the State) is to a

large extent involved in production. Agriculture involved both state-owned
and managed farms as well as private farms. The king was advised to (and
did) carry on mining operations and manufactures, exploit timber and
elephant forests, offer facilities for cattle-breeding and commerce,
construct roads for traffic both by land and water and set up market
towns.
He shall also construct reservoirs (setu), filled with water either perennial
or drawn from some other source.
Kautilya saw the role of the State in relation to industry is

summarized to some extent .While the State is dominant in the economic
system described by Kautilya and was often in the position of a privileged
monopolist, cooperation between the State and the private sector was also
encouraged. Kautilya was of the opinion that a strong private sector is a
course of strength to the state.
It might be noted that king had property rights, as in Europe in all natural
resources such as minerals, forests, wild animals, and fish. Whether this
was conducive to their conservation is unknown. However Kautilya did
recommend practices for the conservation of natural resources, especially
living resources. He was aware that the future productivity of natural
resources is linked to their appropriate conservation. Also, in line with
Hindu traditions, he recommends kindness towards animals.
7.3.30 Use of Land
He had a grand vision of building an empire encompassing the whole of

Indian subcontinent, prosperous, secure against foreign threats, internally
stable, and based on judicial fairness.
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He articulated its essential resource base and structure as thus: The

kingdom shall be protected by fortifying the capital and the towns at the
frontiers. The land should not only be capable of sustaining the population
but also outsiders] in times of calamities. It should be easy to defend from
enemies and strong enough to control neighbouring kingdoms.
It should have productive land (free from wamps, rocky ground, saline
land, uneven terrain and deserts as well as wild and [unruly] groups of
people).
It should be beautiful, being endowed with arable land, mines, timber

forests, elephant forests, and good pastures rich in cattle.
It should not depend only on rain for water. It should have good roads and
waterways. It should have a productive economy, with a wide variety of
commodities and the capacity to sustain a high level of taxation as well as a
[large] army.
7.3.31 Towards higher sustainable Economic Growth with People

Welfare
Good governance in Kautilya's literature is aimed at fulfilling the welfare

of the people. "In the happiness of the King's subjects lies his happiness, in
their welfare, his welfare. Whatever pleases him personally, he shall not
consider as good, but whatever makes his subjects happy, he shall consider
good."
The jargon related to Human Resource Management was not prevalent

then, but its essence was widely practised in Kautilya's times. "The King
should look to the bodily comforts of his servants by providing such
emoluments as can infuse in them the spirit of enthusiasm to work. He
should not violate the course of righteousness and wealth. Thus, he shall
not only maintain his servants, but also increase their subsistence and
wages in consideration of their learning and work."
Kautilya said that good governance and stability go hand in hand.

According to him, there is stability if rulers are responsive, responsible,
accountable, removable, and recallable, otherwise there would be
instability.
Kautilyas Arthastra stressed the importance of education. He stated

that teaching wrong things was a great crime. Learning results in
righteousness and wealth.
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In his opinion, training and learning destroyed unrighteousness, poverty

and hatred. Along with the varied sciences, the student was urged towards
discipline and self-control. Thus it was a combination of intellectual skills
and yogic discipline. Not everyone was capable of the type of discipline he
valued as important for education. Therefore he stated that the lessons of
discipline could be imparted to those who had the desire to learn, capacity
to listen attentively, power to grasp what was taught, retain it in memory,
discriminate between the important and the unimportant, draw
inferences, deliberate and imbibe the truth.
Kautilya stated that sciences should be studied and their precepts strictly
observed only under the authority of specialist teachers. Students stayed at
residential schools called Gurukuls.
Animals were regarded as a part of the same cosmos as humans, therefore

there was veterinary medicine.
The average citizen and villager were expected to defend their own hearth
and home, therefore there was military training. Trading with other
countries was profitable.
Therefore there was commercial education. Statistics was one of the main
subjects.
Data was collected in agriculture but also for marking animals for
categorizing. Besides the intellectual learning the Arthastra stressed
moral education and character building as essential for education.
7.3.32 Social Security and Welfare
There is major emphasis in Arthastra on the duty of the king to assist in

ensuring the social security of his subjects and a requirement that the king
help the handicapped and the unfortunate. For example, it is stated:
The king shall provide the orphans (bla), the aged, the
infirm, the afflicted, and the helpless with maintenance. He shall also
provide subsistence to helpless women when they are carrying and also to
the children they give birth to.
Directed the retention of half the annual produce for the relief
of distress; and provided poor persons with food and seed corn to enable
them to start farming.
In addition, various public activities, such as the building of water

reservoirs and the construction of irrigation works, were a part of policy
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to avert famines. Where the State did not directly undertake such works, it
provided subsidies to those who did.
Policies that, in general, advanced the economic development of the nation

and, therefore, the nations wealth, also provided the people with
increased economic security. Furthermore, security was provided by the
kings effective defense of the realm and the enforcement of just legal
system at home that is just from the perspective of the times.
Kautilya is strongly of the view that the ultimate purpose of economics is

to increase the welfare of the kings subjects. In outlining the duties of the
king, he states:
Hence, the king shall ever be active and discharge his duties; the root of
wealth is activity, and of evil its reverse.
In the absence of activity acquisitions present and to come will finish; by
activity he can achieve both his desired ends and abundance of wealth.
While concepts of happiness and welfare are complicated in Indian

thought, there are undoubtedly similarities between the Kautilyas
objective of economics and that expounded by mainstream economists
from the time of Adam Smith onwards. This is so even though most of
these mainstream economists favoured liberal market systems as a
stepping stone towards the maximization of social welfare, rather royal or
state activity as a means to achieve this goal.
Early Indian thought emphasizes that the duty of the king (State) is to
protect the people, maintain peace and justice and be active in providing
economic assistance to individuals and groups. Those services provided the
rationale for taxation. Thus an implicit social contract existed between the
king and the nations citizens. If the king did not keep to this contract, he
did so at his own peril. For example, in areas where he failed to protect his
citizens, they might even ask for remission of taxes paid.
While Kautilya supported absolute monarchy, it was necessary for the

king to be a benevolent despot to have a legitimate place as head of State.
He positioned the State as an institutional necessity for human

advancement.2 Based on this premise, he outlined almost everything that
the State should do and described how it should be managed for the
maximum happiness of its citizens. He prescribed the following to the
ruler:
Praja sukhe sukham rajyaha prajanamcha hitehitam,
Natma priyyam hitam rajanaha prajanam cha hitam priyam.
Truly, the commonly believed Hindu philosophy is expressed in the words:

bahujan sukhaya bahujan hitaya i.e. public welfare lies in the happiness of
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the masses. Therefore, not only the king but all individuals as well as
institutions should keep the happiness and welfare of the society in proper
perspective in all their deeds or decisions. This also highlights the
prominence of public good over private good.
7.3.33 Planning
The Arthastra is surprisingly calculated on every minute detail and

economic function the exact number of panas is provided salaried
position, legal ramification, commodity, and livestock.
Economics was regulated through such central planning and the highly
detailed attempts at identifying the optimal amount for every economic
function stresses this constant strive towards efficiently improving the
overall utility and welfare of society.
Central planning was directed towards maintaining stability, order, and

efficiency in the economy. Extremely volatile market fluctuations were
stabilized by the Chief Controller of State Trading to keep commodity
prices at a certain threshold level.
Kautilya also mentions that traders and merchants were mistrusted by the
state:
they shall be prevented from oppressing the people. Their

propensity to fix prices by forming cartels, make excessive profits or deal
in stolen property was guarded against by making those offences
punishable by heavy fines.
Similarly, government officials and secret service actively regulated

society to crack down on underground black markets, counterfeiting, and
other violations of economic standards set by the state.
Along with prudence and careful calculation, the state is advised to be

extremely active or energetic in managing the economy, as the Arthastra
states that,
The root of material well-being is activity, of material disaster

its reverse. In the absence of activity, there is certain destruction of what is
obtained and of what is not yet received. By activity reward is obtained,
and one also secures abundance of riches.
The rapid growth and centralization of states seemed to have greatly

reduced the margin for error in government policies and measures
undertaken.
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The Arthastra warns of several instances in which seemingly minor

mistakes may precipitate the entire collapse of the state, and conversely,
the text also advocates methods to engineer similar stratagems on enemy
states through covert operations.
7.3.34 Population
Furthermore, providing amenities for the poor masses indirectly

stimulated population growth, and thus, the overall growth of the state
and economy in the long run. Hence, there is a lot of truth in the verses in
which the Arthastra states that
it is the people who constitute a kingdom; like a barren cow, a

kingdom without people yields nothing.
The emphasis on population growth for indirectly achieving economic

prosperity is also hinted elsewhere in the text, in which the Arthastra
strongly prohibits premarital sex and adultery and instead encourages
fertility via rewards and punishments framed within the legal system.
7.4 Elements of Modern Economics Evident in

Arthastra
There are many elements of modern economics that can be illustrated by
the coverage in Arthastra but only a few aspects can be mentioned here.
Kautilya is deeply aware of the principal-and-agent problem

and the presence of asymmetry of information between the principal (in
this case, the king) and his agents (his servants).
Kautilya recommends the use of spies, proper accounting methods and

scrutiny as well as other measures to deal with such a problem. This is
dealt well in two chapters: one entitled Detection of what is embezzled by
Government Servants out of State Revenue and the other entitled
Examination of the Conduct of Government Servants. However, being a
realist, he concludes that because of asymmetric information it is virtually
impossible to wipe out all embezzlement. He states, Just as it is impossible
not to taste the honey or the poison that finds itself on the tip of the
tongue, so it is impossible for a government servant not to eat up, at least,
a bit of the kings revenue. Just as fish moving under water cannot
possibly be found out either as drinking or not drinking water, so
government servants employed in government work cannot be found out
(while) taking money (for themselves).
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As much of the coverage of Arthastra illustrates, Kautilya was well

aware of the importance for the efficient operation of the State and
economic development of what is described today as good governance.
Furthermore, it can be inferred that he was well aware of the value of
capacity-building amongst public servants, a catch-phrase commonly
used today as a rationale for many foreign aid projects to less developed
countries. To some extent, Arthastra a can be regarded as a manual for
capacity building in the public service in the Mauryan period.
It is interesting to note that Kautilya points out that public

prosperity can sometimes be increased by dispensing with too many
government servants. While his economics is inconsistent with structural
adjustment policies that currently hold centre stage, he was clearly aware
that the public sector could be inefficiently large.
Consumer protection is strongly emphasized in Arthastra. This may

have been regarded as a benefit to citizens of the sovereigns control of all
trade and commerce. The sale of products at the place of production was
forbidden and they could only be sold at designated official urban market
places. While on the one hand this may have strengthened consumer
protection as government officials could verify the quality of wares for
sale, on the other hand, it was also, in all likelihood, a means to more
efficient taxation of produce. Produce was taxed often on the way to
market and at the market place. Furthermore, this procedure probably
imparted urban-bias to the economic system.
The State had a financial interest in ensuring that as much production as

possible was marketed. Hence, the king was urged to maintain and
improve transport systems and to ensure safety from robbers and
vagabonds for those transporting goods. The importance of a good
transport infrastructure to facilitate trade and commerce was stressed by
Kautilya. A further benefit was that it facilitated the defense and
administration of the realm. The importance of such infrastructure for
economic development is again being stressed today by bodies, such as the
World Bank, but probably with a slightly different agenda in mind.
Other aspects, for example, raised by Arthastra include taxable capacity

and the importance of the collection of census data and the keeping of
other national accounts.
7.5 Kautilyas Coverage and Early Western Thought on

Political Economy
Aristotle and Kautilya were contemporaries and significant contact
between Greece and India was evident in the Mauryan period. There
probably was direct contact between the Greek ambassador,
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Megasthemenes, to the Mauryan court and Kautilya. In any case, a

number of ideas of this period were common to the Greeks and Indians.
Rao (1958) does, in fact, compare the political thought of Kautilya and
Aristotle to show how much there is in common between the two greatest
political thinkers of Classical Antiquity. Nevertheless, it should be
emphasized that there are major differences also. For example, unlike
Aristotle, Kautilya did not consider the charging of interest on loans to be
unjust.
Although several of the ideas on political economy expressed in

Arthastra are also evident in European thought before Adam Smith
(and after), many of Kautilyas conceptions of factors contributing to the
wealth of nations seem to have been superior. For example, while he
stressed the importance of the development of agriculture for the
economic prosperity of the nations, he by no means considered agriculture
to be the sole basis of wealth, as some French Physiocrats appeared to
argue. He also stressed the importance of developing industry and
commerce as step towards securing the wealth of the nation. He knew that
the wealth of the nation and the security of the state depended on the
development and efficient operation of several sectors of the economy and
he was able to envisage their economic interdependence as in inter-
industry analysis.
While there are strong parallels between Mercantilist economic theory

and Kautilyan economics, Kautilyan economics is much more
sophisticated. It seems likely that many Mercantilists believed that
treasures (money), such as gold and precious metals, were the basis of
wealth. The king or prince was, therefore, generally advised to build up
his Treasury. This could be done by several means. For example, by taxes
on subjects and by the use of state monopolies. But in particular, the
Mercantilists stressed the importance of sustaining a surplus in foreign
trade as a means to accumulate national treasure.
Nevertheless, Mun (and other Mercantilists) equated treasures with

economic wealth and did not have a clear conception of the role of the
Treasury in relation to the defense and wealth of the realm. There is no
evidence that Kautilya fell into such a trap. In fact, he did not believe that
national wealth consisted of money or treasures, and while he thought
that the Treasury should be well provided for, he had a clear conception of
the purposes for which Treasury finances should be used. For Kautilya,
treasures were only a means to an end, not economic ends in themselves.
According to Hutchison, Mun (and some other Mercantilists) envisaged

international trade as involving a strictly zero-sum a nation obtaining a
surplus in trade with an exporting country was seen as gaining at the
expense of the exporting country. This contrasted with Kautilyas position.
He thought that foreign trade should be encouraged and believed that it
457
could benefit an exporting and importing country. He saw foreign trade as

advantageous and suggested measures for its expansion. He encouraged
imports but understood that it could not be a one way trade; hence, in the
long term, he suggested a balance between import and export be
maintained. He does not display any of the fears of foreign trade that the
mercantilists after him had displayed. He stated that before successful
trade contract can be established, it must be beneficial to all countries
concerned. Therefore, he recognizes mutual gains from trade.
7.6 Topics covers in Arthastra
Arthastra broadly covers fourteen areas.
One deals with the King his training, appts of minister etc.
Two describes the duties of various officers of the state and gives a
complete picture of the states activities.
Three is concerned with law and administration of justice.
Four is on suppression of crimes.
Five is a sundry collection of topics including salaries of officials.
Six is on foreign policy and constituent elements of state.
Seven is an exhaustive discussion on the way in which each of the six

methods of foreign policy may be used in various situations.
Eight relates to calamities.
Nine is on preparations of war.
Ten is concerned with fighting and types of battle arrays.
Eleven is on how must a conqueror deal with a number of chiefs rather

than one king.
Twelve shows how a weak king when threatened by a stronger one must
overpower him.
Thirteen is concerned with the conquest of the enemys fort by fighting.
Fourteen deals with occult practices.
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Foreign Policy - The welfare of a state depends on an active foreign

policy. One of the main reasons for Indias downfall is that we turned
inward looking ceased to be abreast with the developments in the world.
An enemys destruction shall be brought about even at the cost of great
losses in men, material and wealth. Post independence Indias rulers have
not followed this. Pakistan has been supporting terrorism in India for over
a decade now. Leave aside defeating their designs we have failed to do
anything by which they pay for their deeds, we have offered them Most
Favored Nation Status, eased Visa restrictions.
A king weak in power shall endeavor to promote the welfare

of his people. For power comes from the countryside, which is the source
of all activities. No Indian Prime Minister, weak or strong has followed
this dictum. The Marxists of Bengal have followed this dictum to carry out
land reforms program in rural Bengal, i.e. why they have ruled over
Bengal for over 25 years.
One should never submit spinelessly not sacrifice oneself in

fool hardly valor. It is better to adopt such policies as would enable one to
survive and live to fight another day. After spending months in Kargil
unnoticed, Pakistan could not live with pressure from the U.S. and Indias
armed forces. Having made a point, it withdrew, only to bring India on its
knees at Quandhar followed up with killings, during Bill Clintons visit
and of Amarnath yatris. More than 1,000 people have lost their lives in
Jammu and Kashmir this year, more than Kargil and the cost to Pakistan
is! A friend of mine had this great ability to swallow any humiliation.
When she was on a weak wicket or knew it was a battle she could not win,
she would keep quiet and bid her time. As and when the tide turned, was
in a position of strength, she would come down heavily on the people who
had humiliated her in the past.
The basic principles that govern the Kautilyan theory of

foreign policy are -
The king shall develop his state i.e. augment his resources and power for
him to embark on a conquest. What it meant that a prosperous state
which looked after its people had high rates of economic growth had the
where withal to undertake military conquests. For whatever reasons, India
is not a prosperous state today, cannot take on the burden of a conquest,
high defense expenditure. On the other hand, we have the U.S. Economic
prosperity and superior military power have made it the worlds only
superpower. It embarks on military and economic conquest. Export its
products and culture, Intel chips, McDonalds, Microsoft products and
may be chicken legs shortly.
459
The enemy shall be eliminated. If only Prithviraj Chauhan had digested

this there might never have been any Muslim rule in India, if only Indira
Gandhi had resolved the J and K issue in 1971, how many women would
not have become widows today.
Those who help are friends. Ask the Pakis what it means to have friends
in China, Saudi Arabia. Russia has stood by us during last thirty years yet
we seem to be so smitten by Bill Clinton. If Al Gore does not become
President, the party with the U.S. might just be over. Be friends with the
U.S. but remember, it is the U.S. that continues to impose sanctions on us,
did not sell us supercomputers or prevailed upon Russia against giving us
the technology for the cryogenic engines. In the process, we have ignored
France, a country that is known to pursue a foreign policy independent of
the U.S and is keen to further diplomatic, military ties with India. As for
our former rulers, the Brits continue use the Muslim-Pakistan card
against us yet. In August 2000, why did the British Home Minister visit
Mumbais Jama Masjid?
A prudent course shall always be adopted. One has to be

practical, be guarded against spineless submission and foolhardy valor.
Peace is to be preferred to war. We have taken this policy to the other

extreme. Peace is to be preferred when the relative power equation
between a king and his enemy is not likely to change as a result of any
action.
The six methods of foreign policy are Samdhi, making peace, by

concluding a treaty. Vigraha, hostilities could mean a conventional war, a
secret war or a proxy war as is known today and an undeclared war. The
last twenty years have seen proxy and undeclared wars become more
effective. Instead Pakistan prints fake Rs 500 rupee notes to destabilize the
Indian economy and provides shelter to Mumbais underworld who extort
money from businessmen, Bollywood.
Asana means staying quiet and Yana is preparing for war. Samsraya is
seeking protection from a stronger king ( just like Japan is under the U.S.
nuclear protection umbrella) and Dvaidhibhava is the policy of making
peace with a neighboring king in order to pursue, with his help, the policy
of hostility towards another.
Progress and Decline Any activity which harms the progress of the
enemy engaged in similar undertakings is also progress. Internal
Security has plagued India for centuries. Threats were both external and
internal. Till about the 300 BC, the threats did not result in mass
destruction, plunder and rape so their impact was not as bad as the
invasions of Alexander, Huns, Kushanas, Muslims and Christians. Indias
economic fortunes dwindled with the advent of the Christian rule. Today,
460
a substantial portion of our attention and revenues are spent on internal

security issues. Imagine if there were no problems in Jammu and Kashmir
and North East. Scarce Resources would be spent on education and health
of Indians in the sub continent. (There are some 2 crore Bangaldeshis in
India). According to the Home Ministry, the Cost of ISI Terror in the
decade 1988-1998 resulted in Rs 64,500 crs spent on Internal Security.
Think of how productively the money could have been spent.
Setting out on a Campaign After the king has increased his strength he
shall set out on a campaign against the enemy, choosing a time when the
enemy does not have all his forces mobilized. He shall set out on a
campaign when he finds that the enemys troubles with one constituent of
his state cannot be compensated by the other constituents, the enemys
subjects have become impoverished, disunited due to oppression by the
troops or ill-treatment by their monarch and thus have become susceptible
to enticement to desert. This is what Kargil was all about.
Treaties - Non-intervention, negotiating a peace treaty and making peace

by giving a hostage-all mean the same thing, since the aim of all three is to
create confidence between the two kings .Some feel that a treaty when
backed by a hostage is more stable. K disagreed. An agreement made on
oath or word of honor is stable in the world and the next. (We believe in
re-birth). Not keeping hostages is fine when you are dealing with decent
guys but not when you are dealing with a country whose reason for
existence is hatred for Bharat. After defeating Pakistan in 1971 India took
93,000 soldiers as prisoners of war yet released them without any
substantial gains.
Treaties by the Weaker King - A weak king, attacked by a stronger king

whose armies had already started moving against him, shall quickly
submit and sue for peace with the offer of himself, his army, treasury and
territory. lets take the Indo China War of 1962. Everyone in the Indian
Government knew that there was no way we could take on the Chinese
militarily yet Nehru told the press in October 1962 that he had ordered the
army to throw out the Chinese from our territory. Knowing the Chinese
resolve to take area in Ladakh, I wish he had the guts to accept Chou-en-
lais proposal of 1960 where by China would accommodate India in the
North East if India were to accept the line of control in Ladakh. He would
have saved his countrymen the scars of humiliation.
Liberating the Hostage The hostage shall liberate himself by his own
efforts or be helped by clandestine agents adopting various disguises, using
entertainers, attendants (adopted by Shivaji when he escaped from Agra),
and avoiding recapture.
Choice of Allies When there is a choice between two allies, the one
amenable to control, though temporary is preferred because he remains
an ally as long as he helps. The real characteristic of friendship is help. If
461
I have two friends who are very dear, the one who helps me willingly is a
true friend. The constant ally giving small help shall be preferred. The
temporary friend giving substantial help is likely to withdraw for fear of
having to give more or will expect it to be repaid. The constant ally, giving
small help continuously, does in fact give great help over a period of time.
An ally who is likely to grow in power after defeating the enemy and thus
become uncontrollable shall be embroiled in a conflict with his own
neighbor or such actions would be taken as would oblige the ally to remain
obedience, in return for help received. This reminds me of a colleague.
He used his juniors to fire missiles at other departmental heads and at
people within his department. With time, the junior became powerful.
Then he would sideline them until they came back to him and pleaded for
help.
Planning a Campaign K lists eight different factors which have a bearing

on success or failure. If the king concludes that he is superior to the enemy
he should go to war. The first factor is power. One is not foolish to attack a
stronger adversary. Power has three constituents intellectual power,
military might, morale. The next two factors are place and time. This
means terrain and season when battle will be fought, estimated duration of
war. The next is deciding on the right type of troops and the right season
for setting out. Another factor is the danger of an internal revolt against
him. A manager must never go on leave if he is unable to nominate a
person to do duty for him in his absence. Next is what does he hope to
achieve and the extent of losses. The last factor is the possibility of
treachery. When taking decision to set out on a campaign, it is imp for the
King and his councilors to sit together. K warns against a king showing
undue kindness or weak qualities. Once you decide to go for a military
campaign, it must be pursued steadfastly.
An in depth analysis helps the king in making correct judgement. If you

then realize, that your opponent is stronger then the campaign must be
abandoned. If you do an in depth analysis of your strengths and
weaknesses before getting into a negotiation, it enables you, to invariably
make a better decision. K maintains that a king faced with losses should
save the best of his resources; he should save himself to fight another day.
That is what Bhutto did in 1972 and Gen Mushraff in 1999.
A conqueror, having assured himself about his superiority in power,

place and time shall leave behind a third of his army to protect his
capital. The Pakis have through the ISI, set up bases in the country;
Mumbai is just one hot spot. (During the Kandhar hijacking crisis and the
recent attack on Chhota Rajan, key players were found in a Mumbai
suburb, Jogeshwari.) As and when the next conventional war happens, the
Indian army will not only have to fight the enemy across the border but
one within. Which means that an army that is already over stretched
fighting anti-insurgency operations in Jammu and Kashmir and the North
East will have to retain a portion of its troops for internal security? I
462
remember an army colonel telling me that only the Army could match the
fire power of Mumbais underworld.
Against an attacking Confederacy 7.14 deals with a situation where a

king is beset by a confederacy of allies and needs to recoup his powers and
build up his strength. The first step is to break the unity of the
confederacy. Lets look at a Finance Manager who is upright, honest and
has become a pain for the other head of departments. The HODs or allies
would identify managers who work for the finance manager, win them
over to their side, encourage them to revolt i.e. they would sow seeds of
dissension. This akin to breaking the unity of a confederacy.
When the king under attack cannot afford the time needed to sow
dissension among the members of the confederacy, Kautilya advises that it
is best to make peace by making concessions, with the time bought by
peace, he shall try to remedy his weaknesses. What to do is to remedy each
type of weakness is given. Moral of the story is never taking a panga;
pick up a fight till you have the power to back it. Or else, wait; build your
strength and then attack. You must be able to swallow your ego to do this.
The Weak King Kautilya cautions against spineless submission and

foolhardily valor. It is better to give up what will be taken by force and
live to fight another day. Only if the circumstances are not conducive to
peace shall he fight. A weak king may try to reduce his losses by suing for
peace. Equally, he can employ clandestine methods to kill or weaken the
aggressor. Peace can be sought even after the aggressor starts his
campaign by offering him useless things. If this fails an envoy can be sent
to dissuade the aggressor from continuing his campaign. If this is also
useless, the aggressor can be killed or undermined by provoking rebellions
and attacks. Or, he can be assassinated.
7.7 Conclusion
Having thus far discussed the different business related functions

associated with the process of exchange of commodities in the Mauryan
era in medieval India, it reflects on how marketing has always played a
vital role as an integrated function of trade even then.
The terminologies employed may have evolved over time, but the nature of
exchange and the role of marketing as an exchange function seem
consistently pertinent in all settings.
Arthastra is a very comprehensive treatise on the governance in a

monarchical Vedic state. Kautilya had a rational approach to governance
and statecraft.
463
He conceptualized the state and the office of the kingship to be human

artifacts. Also his model of the human being was very realistic. However
he expected super human qualities from a 'human' King. Chandragupta,
Bindusar and Ashoka matched this ideal but their successors could not.
Clearly the system of checks and balances amongst the king, the
associations and the citizens worked well as long as the King wanted it to
work.
The vision of Kautilya was a creation of a strong and prosperous Vedic

order so the foreigner invasions (like that of Alexander) could be repulsed.
The success of the Muslim invasion suggested that either the governance
by the 'Hindu' Kings was not according to the tenets of the Arthastra or
the Arthastra philosophy itself had become antiquated. Probably both
were true.
By any standards, Kautilyas Arthastra represents a remarkable

scholarly achievement. Although containing some inconsistencies, and
some peculiarities from a modern perspective, it was a valuable guide to
political economy in its time and provides us with privileged insights into
the Mauryan economic system and society. Its close association with a long
Hindu tradition is clear, such as its emphasis on the social responsibility of
the State towards its citizens.
With sympathetic and careful reading, one can glean from it some
economic wisdom of relevance to our times, and it certainly can be used to
illustrate several modern economic ideas, as was shown. In his conception
of the factors that influence the wealth of nations, Kautilya was well ahead
of Western thinkers, It took around 2000 years for Western economic
thought to reach and then possibly surpass the level of economic
sophistication apparent in Arthastra.
Possibly Adam Smiths Wealth of Nations represents the watershed. While

Adam Smiths advocacy of a liberal market-based economy differed from
Kautilyas support of a centrally planned (mixed) economic system
secured by the monarchy, both had the same conception of what
constitutes the wealth of a nation and what the economic goal of a nation
should be. Both agreed that money per se does not constitute a nations
wealth. Both agreed that the nations resources had to be developed by
investments and other means to add to wealth.
Kautilya anticipated the teachers of the Historical School, when he

rejected the absoluteness or cosmopolitanism of Economic Theory. He did
not believe that there was One Universal Law which is applicable to all
conditions and all times. He held that economic laws should be adapted to
changing conditions of time and place. Therefore, we can conclude that
Kautilya would have accepted the proposition that appropriate social
464
mechanisms for the efficient creation of national wealth could vary with
the passage of time and could differ between nations.
Covering various topics on administration, politics and economy, it is a

book of law and a treatise on running a country, which is relevant even
today. His ideas remain popular to this day in India.
Kautilyas Arthastra did provide a valuable basis for economic science,

a basis long neglected. It contains useful insights about economics. These
insights were only independently discovered by Western thinkers in the
eighteenth century. As for the specific social and economic system that
Kautilya outlines and provides advice about, he would be the first to agree
that his advice is relative to his time. Therefore, Arthastra should be
assessed in its historical context. Nevertheless, it contains many points of
relevance to modern economic conditions.
As such, the Arthastra provides extensive coverage on the overall

economy, which includes: infrastructure (roadwork, irrigation, forestry,
and fortification), weights and measurements, labour and employment,
commerce and trade, commodities and agriculture, land use and property
laws, money and coinage, interest rates and loan markets, tariffs and
taxes, and government expenditures and the treasury.
465

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Chapter-7

Economic Thoughts of Kautilya

7.1. Introduction 413

7.2. Kautilyas Arthastra 414

7.3. Economic Ideas of Kautilyas Arthastra 415

7.4. Elements of Modern Economics Evident in

7.5. Kautilyas Coverage and Early Western Thought

7.6. Topics Cover in Arthastra 458

7.7. Conclusion 463

The treatise comprises a cohesive whole, including economic

Kautilyas Arthastra describes how these functions the field of

Kautilyas Arthastra contributes to the history of marketing thought in

It is remarkable that a book such as Arthastra should have been written

Essentially, Arthastra is a treatise on political economy interpreted in its

Kautilya was a great statesman as well as a great scholar. He played a

Kautilyas work can also be used to illustrate several aspects of economics

problem, information asymmetry, urban-bias, principles of taxation, the

7.2 Kautilyas Arthastra

The teachings of Kautilya, also known as Chanakya and Vishnugupta,

Kautilyas work was encapsulated in the book Kautilyas Arthastra;

A significant part of the Arthastra deals with the science of wealth or

Kautilyas Arthastra focused on creation of wealth as the means to

A perfect balance had to be maintained between state management and

Arthastra literally translates from Sanskrit as the science of wealth.

treatise, therefore, takes into account economic, political, diplomatic,

The traditional ends of human life, Dharma (righteous living), Artha

The Arthastra focused on preservation of the state through alliances,

Arthastra takes a managerial perspective on managing the affairs of the

7.3 Economic Ideas of Kautilyas Arthastra

It deals with self-sufficient economy based on indigenous ways of

The economy based on indigenous ways of production; was in a

The state accumulated wealth by generating resources in the form of

Because of the regime was authoritarian in nature, everything was

Besides maintaining the existing productivity in forests, factories, mines

Kautilyas work dealt with such diverse economic subjects as accounts,

The state also entered the market as a trader. It engaged in selling

It had its own superintendent of commerce who would supervise the

The revenues earned by sale of resources possessed by the state would be

Manufacturing industry gained impetus in the Maurya period, which was

7.3.2 Economic Administration

Money was used as the medium of transaction, in the form of coinage.

This is indicative of the function of monetary exchange which leads to the

The value of coinage was sought to be maintained by stringent

A special official, the Coin Examiner, certified the genuineness of coins

The governance structures then projected the potentialities of centralized

Manufacturing establishments also kept a stock register showing the

The procedure of year-end Audit existed even then.

Thus, all individuals and establishments involved in manufacturing,

Significantly, Kautilya was concerned, at least to some extent with

For example, he recommended specifically the listing of revenue collected

He added, Every official who is authorised to execute a task or is

7.3.5 Kautilya on the Creation and Preservation of Wealth

Kautilya identified quality of governance, human exertion, accumulation

It is worth noting that Kautilya understood, by more than 2,000 years

Kautilya suggested, Hence the king shall be ever active in the

A king can achieve the desired objectives and abundance of riches by

Kautilya wrote, In the interests of the prosperity of the country, a king

In fact, he believed in the virtuous cycle of good governance, riches,

7.3.6 Provision of Infrastructure and National Security

He understood the importance of infrastructure to the creation of

He added, A king makes progress by building forts, irrigation works or

Kautilya wanted to maintain national sovereignty at every cost and by

7.3.7 Sources of Revenue

He argued that both the provision of infrastructure and having a larger